Question

Use Figure 20.1, which lists prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following July expiration options, assuming that the stock price on the expiration date is $150. (Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "O" wherever required. Negative amounts should be indicated by a minus sign.) Payoff Profit/Loss a. Call option, X = $145.00 b. Put option, X = $145.00 C. Call option, X = $150.00 d. Put option, X = $150.00 e. Call option, X = $155.00 f. Put option, X = $155.00

Answer 1

Let the stock price on expiration date be denoted by S and the exercise price be denoted by X. Let Initial Premium Paid be denoted by !. Payoff for a call option = max(S - X,Q) Payoff for a put option = max(X- S,0) Profit/Loss for a call option = Payoff – Initial Premium Paid (1) %3D a) Call option, X = $145 Since option is in the money at expiration, it will be exercised. Payoff = max(150 – 145,0) = $5 Profit = $5 - 1 b) Put option, x = $145 Since option is out of the money at expiration, it will lapse. Payoff = max(145 – 150,0) = $0 Profit = $0 -1 i.e Loss = | c) Call option, X = $150 Since option is at the money at expiration, it will be lapsed. Payoff = max(150 – 150,0) = $0 Profit = $0 – 1 i.e Loss = I %3D %3D d) Put option, X = $150 Since option is at the money at expiration, it will be lapsed. Payoff = max(150 – 150,0) = $0 Profit = $0 - 1

i.e Loss = | e) Call option, X = $155 Since option is out of the money at expiration, it will be lapsed. Payoff = max(150 – 155,0) = $0 Profit = $0 –1 i.e Loss = ు Put option, X = $155 f) Since option is in the money at expiration, it will be exercised. Payoff = max(155 – 150,0) = $5 Profit = $5 – 1 %3D Profit/Loss $5-1 Payoff $5 Call Option, X=145 Put Option, X=145 Call Option, X=150 -I 2. 4 Put Option, X =150 -I Call Option, X=155 Put Option, X =155 $5 $5-1